The study - which canvassed the views of over 1,000 senior executives around the world, including over 60 in the UK - revealed that over 50% of respondents in the UK believe that financing would be available to fund major acquisitions within the short term (six months), up 10% on October 2010. The same number identified an improvement in credit capital conditions, an increase of more than 15% over the same period.

Plans to acquire on the up

With increased access to finance, UK businesses have a more positive outlook towards acquisitions compared to their G7 counterparts and those from the BRIC economies, with plans to acquire rising from 39% in the next six months to 50% in the next two years. This compares to 32% and 43% respectively for the rest of the G7 countries, and 31% and 44% for those in BRIC economies.

Jon Hughes, Transaction Advisory Services leader for UK & Ireland, at Ernst & Young, says: “These figures indicate that the number of organisations ready to conduct deals, when the right target is identified, is strong. While it would be difficult to call an M&A bounce back we are certainly seeing signs that confidence is back on track.

“But 2011 looks to be no less challenging or predictable than 2010. There are many complex issues in play impacting capital markets, both globally and domestically. There is the uncertainty surrounding the geopolitical landscape in the Middle East; and closer to home, the pressures of rising inflation, a potential upwards move in interest rates and the full impact of the austerity measures yet to be felt. These factors only go to underline the uncertainty and the challenges executives are faced with.”

UK focuses on divestments

An increasing number of companies also say they are planning divestment activity over the next six months – nearly a quarter in the UK (22%) and similar numbers across the rest of the G7 (19%) and BRIC economies (18%). However, medium term strategy in the UK appears less well defined, as the proportion of companies who are neither likely nor unlikely to make divestments grew by 14% between the next six months and two years.

Hughes continues: “UK businesses appear to have a very clear and defined strategy around acquiring and divesting in the short term, but this certainty fades away medium term. A significant factor contributing to this uncertainty could well be the medium term impact of fiscal and monetary policy both at home and abroad, and the likelihood of regulatory changes.”

Emerging markets targets, not so hot for UK

For businesses considering an emerging market acquisition, UK entities fall behind their global competitors. Globally, the percentage of companies considering an emerging market acquisition in the next six months has increased by 50% over the last 18 months. In contrast, interest in emerging market acquisitions for UK corporates has fallen nearly 30% over the same period, with joint venture/alliances being more popular, with 30% favouring this route.

Hughes comments, “UK businesses appear to be more risk averse, perhaps conscious that an emerging market investment, even with the support of an experienced joint venture partner, involves significant risks, not least in the areas of political uncertainty and business culture.”

New barriers to M&A

While corporate sentiment towards acquisition and divestment activity has become more positive, the overall perception from UK businesses is that obstacles to transactions have increased, with board/audit committee scrutiny (51%), regulatory pressures (47%) and buyer/seller expectation gaps (42%) ranking as the three highest obstacles.

Globally, the number one deal breaker now is the gap between buyer and seller expectations, which increased to 50%. Concern over the uncertainty or complexity of valuations was significant for 49% of respondents.

Hughes explains, “In an atmosphere of considerable uncertainty, it is important that transactions add significant value and are of benefit to all stakeholders. Likewise, volatility makes accurate valuation and precise execution all the more essential and anticipated changes in regulation mean organisations should consider and plan their M&A strategy carefully.”

Stress remains

Although the study reveals a more positive outlook from UK businesses, in terms of accessing finance and conducting transactions, many organisations still face significant stress in their operations. Nearly half of core businesses in the UK (48%) and over half of subsidiary businesses were showing some signs of distress, blaming liquidity pressures and profit warnings.

“Despite the positive outlook, stress and distress is still very much a part of the equation for their operations. While many companies have taken action to address their financial issues by preserving cash and improving their working capital, others still need to work through the process. The companies that have done so are now moving into a new phase of optimising their activities to achieve sustained organic growth – they’ve taken difficult decisions and are now looking at ways to get fitter still,” Hughes concludes.